Essential Austrian Economics: Economic Calculation

A key idea for the Austrian School is the  importance of prices in making economic decisions,

Particularly for informing entrepreneurs  and businesses of consumers' desires and

how best to produce these goods and services. The Austrians recognized the critical role

prices play to help people allocate limited  resources efficiently, which benefits society.

Let's explore this idea with an example. How  does an entrepreneur or business figure out

which combination of resources is best to make  a product, say bicycles? The answer is prices.

Nick and Jenny are both bike manufacturers  trying to decide what material to use for

the frame of their new mountain bike. There are many options that could work.

Jenny reviews the prices and calculates how  each would affect the pricing of her new bike.

She decides aluminum is best  given its price and qualities.

Nick ignores prices and instead decides  on Platinum, because the company selling

it sounds cool – Titan Metals. However, platinum is more scarce

than aluminum and so it has a much higher price, which means Nick's bike is very expensive compared

to those offered by his competitors like Jenny. Jenny's choice of aluminum allows her to

easily keep up production with  the demands of her customers.

Unfortunately, Nick's resource choice is  also likely to disrupt other industries.

A nearby car manufacturer -  who relies on platinum for its

engines - is forced to slow production  because less platinum is now available.

With price information, Jenny makes a more  informed choice about the resources she needs,

making it more likely her business  will prosper - and the efficient use

of resources makes society better off since  scarce resources are being used more wisely.

For more information on Austrian economics, visit essentialaustrians.org, and to learn more about Essential Scholars, visit essentialscholars.org